Trend Trading

Sayed, thanks for the kind words of encouragement. I regret that risk and money management are such dry subjects, but I consider this the single most important aspect of successful trading. I'll try to speed on through this section and wrap it up as quickly as possible. I'm certainly not trying to write the definitive book on trading risk here. At best I hope to introduce some traders to dimensions of risk that they may not have previously considered. When I'm finished, I'll encourage any new traders to do a deep dive into managing trading risk. After I get through risk and money management, I'll proceed onto trade entry, trade management and exit, which I think should be lots more fun. Best success. - G

Hi Graviton, nice thread.

But there is more at risk.. your balance can become negative...
The negative balance protection some brokers offer isn't free either.

I'll now wrap up my discussion of risk management. Initially I discussed the most damaging types of risk, those that can directly transfer cash from our trading account to those who probably don't need it. We can't eliminate risk from our trading but we can use best practices to control risk at every step of our trading. In a very real sense our job is to assume some small piece of risk from others and to be richly rewarded for managing it wisely. There is risk of loss from the initial entry to the stoploss setting. This can be effectively controlled by the distance to the stoploss, which I usually set around 1 ADR, and the size of the trade, which I initially set at 0.5%. Black swan risk such as a large gap move against our position can only be controlled by limiting the size of the trade. That's the reason I limit my trade size to 0.5% of my account balance. I have stress tested my trading and determined that at that size I can survive an 800 pip gap move against my position. Next we looked at risk to floating profits. We turned lemons into lemonade there and used floating profits to fund an increase the size of our position without increasing the risk from entry to stoploss (though the black swan risk always increases with size). Next we'll quickly examine missed opportunity costs, sunk costs and broker risks.

Missed opportunity costs are everywhere. Every day I miss thousands of good trades in some market somewhere in the world. It's difficult to simply ignore missed opportunities but that's what I have to do. Trying to chase trades because of missed opportunities is a losing game. There is no way to place a value on the many missed opportunities in the world, most of which I'll never know about, so I simply ignore them and move on with my trading plan.

Sunk costs are another dangerous distraction. Often novice traders will think, gee, I've lost so much on this trade already, it makes no sense to bail out now, maybe it will come back? Hope is not a strategy folks. Set your stops and either bail out early before the stop hits because you see the trade isn't working right (which can serve to improve your reward:risk ratio), or let it hit the stop and move on. Never let your bad idea turn into a worse one. Never let sunk costs be a wrong headed justification for losing even more.

Finally, I'll quickly address broker risk again. What if your broker does something really stupid and goes bankrupt? Do you get your deposit back? Sadly, probably not. Deposits with most Forex brokers are not insured. Is yours? On January 15th, 2015 the SNB suddenly dropped it's price peg on the CHF. FXCM instantly lost $225 million and their stock dropped 90%. Trading accounts were wiped out and several smaller brokers went bankrupt, unable to return customers full deposits. Some brokers pursued customers to pay back the negative balances of their accounts. We discussed this a little before. Any money you place in a Forex trading account is at risk, whether you are trading it or not. You shouldn't keep more cash in your trading account than your trading plan requires. Some brokers offer to hold excess cash in a segregated account that isn't subject to trading risk. Buyer beware. You should only do business with large and well funded brokers. If you trade large, you might want to consider splitting your funds among several brokers. So if you have funds split among 4 brokers, your worst case damage should be a 25% loss if a broker does something very stupid. That's serious, but it can be overcome.

I've only begun to touch the surface of risk and money management here. I consider us risk managers rather than traders. Trading is just hitting the buy or sell button. A 6 year old can do that. In fact, a 6 year old can look at a chart and tell you if price is mostly going up, down or sideways. Risk management is a big girl (or boy) job. It pays extremely well and once it's understood, it's relatively stress free. I hope I've managed to help at least a few traders here to look at their risk and money management in a more professional fashion. If you read all this and didn't get anything out of it, well, I guess I failed, but at least I tried. Don't be easily scared off. You don't have to have super computers continuously recalculating the Value at Risk of all your trades to do a much better job of understanding and managing the risk you are taking on. I'd encourage anyone who feels they should learn more about this subject to begin their research now. There are many articles on the subject on the web and some good YouTube videos. I'll ask the readers to suggest their favorite book on the subject. So, once again, it's a discussion thread. Comments, questions, suggestions, complaints? - G

Absolutely.

Recently someone asked, what I did for a living, I replied "I am a Risk Manager". The next question was about the weather.

I believe most traders that blow up their account is due to not managing risk properly even if they have a viable system.

Another great post.

I would say don't trade Forex with capital, you can't afford to lose.

I once went to the very cluttered office of a stock trading computer systems designer to get a quote on automating my trading system. After talking for a while he handed me a blank note card from his disheveled desk and said, write down your entire trading method on the front of this card. I thought for a moment and said, I can't. My system is way too complex to write down every detail on the front of one note card. He asked, do you mind if I repeat something you just said to me? I said, sure. He said, "You told me, My system is way too complex...". I'll remember that discussion as long as I live. He was absolutely correct.

My readers can relax now. We are past the hardest part of this system. everything else from here on out can be found in almost any good trading book, but I'll go over it just to complete this thread. Shortly, I'll continue with the next sections, entry, trade management and exit.

I'll post a chart for those who like pretty colors and such. Here is a 3 entry GA long chart I currently have running. It's a live chart and a very profitable trade at the moment. We like these. They make us happy. As usual, entry #2 and #3 are 60% the size of the base entry, so this trade actually has no remaining sl risk and has profits locked in. So sweet. - G

Before moving on, I'll point out again, this is the way I trade. Others may have more profitable methods or methods that better control their risk. I can't really evaluate those because I haven't traded them and every person is different. I'll just explain here how I trade and why I trade that way and leave it to the reader to make adjustments that fit their style. I'm sure some readers can ride this bucking bronco way better than I can.

First we'll discuss entries. Everyone loves entries. They are so simple, so full of hope and promise. After using my favorite method to spot what may be a trend (secret: it's the golden cross), I'll only have two sorts of entries. The base trade and stacked entries. The base trade is entered so I only risk 0.5% of my account balance if it stops out. Stoploss is set a little less than 1 ADR. I put a temporary TP on of 3X sl. Then we wait. It either goes up or down, so call it a 50/50. If it goes down, I'll usually exit the trade before it hits the stoploss because it looks like crap. If i'm asleep (I take naps), the stop takes it out. If it soars while I'm awake, I'll stack trades on about every 1 ADR. If it soars while I'm asleep and hits the TP, I just made a 3 to 1 return and that's fine too. That's basically it for the base trade.

Now comes the cool part. If price soars, I'll stack additional trades on about every 1 ADR. The additional trades are sized to be 60% of the original trade so risk is reduced on stacked trades. We always want to trade to reduce risk where we can. Stops are moved up to reduce stoploss risk and lock in profits as I trade. I'll discuss that a bit later.

If you have some fancy smancy method to trigger your entries, use that. I'm just a simple minded guy and probably wouldn't understand it. Some people prefer to wait until a pullback is ending to make an entry. I want to enter anytime price is moving in my favor. If it's making a little retracement against me, I'll wait until that ends, but if it's moving in my favor, I'll just enter. That's about all I have to say about that. Any comments or questions? - G

[quote=Graviton;11569947]I'll just explain here how I trade and why I trade that way and leave it to the reader to make adjustments that fit their style. I'm sure some readers can ride this bucking bronco way better than I can.[quote]

The best part of doing this is that people can also use part of their margin for other trades. Go ahead and scalp, or do the news spike "dance", or grab 10-50 pips here and there using whatever process. I like the idea of doing some M5 or M15 trading, but usually I end up a little poorer from it.

So why do it? Fun, I suppose and probably a bit of boredom waiting for new signals and/or the market to move and either advise me to take off my trades or add more.

The balance of all that is I am very aware of which one will not make much (or any) real profits and which one will.

Graviton - Thanks again for all these posts. Very helpful and motivational.

Your very welcome Nefser. If you get bored, find a good book to read. Market Wizards by Schwager, Trade your way to financial freedom by Tharp or Trading for a living by Elder are all favorites of mine. Well, those are all very old, like me. Another more recent volume is Trend Following by Covel. You can probably get any of these used and in good condition. You just might find a golden nugget in one of them. Best Success. - G

Now I'll discuss a broad category of techniques I'll call trade management. These are things I do as I trade. I'll try to discuss my logic and the reason I believe they work as I go. If they make sense to you, try them. If not, simply move on. The same set of tricks and methods aren't going to work for everyone. If you have a favorite method that I didn't mention, feel free to post it along with the logic as to why you think it works (no reading tea leaves please).

Trade management begins before my first trade is entered. I want to diversify my trading a bit but I already know I can only afford a limited number of trades. I have already done my homework and know if I risk no more than 0.5% of my account balance on any trade, I can carry about 14 to 18 trades, plenty enough to diversify my trading. Once I have selected a pair that meets my trending criteria, I'll enter with my properly sized trade (approximately 0.01 lot per $1,000 account balance) and set stoploss to a little less than 1 ADR. I set the stop loss to a little below 1 ADR because that reduces my risk a little from a 1 ADR stop to start with. By reducing the possible loss in a trade, even a little, I increase the reward to risk ratio in my trading overall. I want to take every chance I can to reduce risk. I always enter when price is moving in my favor, because I think it would be stupid to enter when price is moving against me.

Next I'll set a temporary TP at 3 times ADR. That guarantees me that in case of a sharp move in my direction, I'll walk away with at least a 3 to 1 reward to risk ratio on the trade. I hit these every so often when I'm taking a nap. I like naps.

My GA long now has 4 trades stacked on it. We had a little consolidation, but it seems to be breaking out of it now. Another live chart for those who like such things.

Thanks for the color G. I can see it from across the room. Hahaha

AG

So once the first trade is on, stop loss set and temporary Take Profit set, I'll look for another trend to trade. I'll repeat the process as many times as I can find good trends, or until I've hit my maximum margin usage limit (50%). I often wind up with 6 to 12 of these starter trades running. Some will do well and some will turn to crap. If the trade starts to look really bad, I'll close it and take a loss smaller than where the stop loss was set. Again trading to reduce risk. Unless I'm napping. Then the stop loss will catch it, no worries. Trying every good trending pair not only increases my chances of catching that "win the lottery" trade, but it also provides diversification. So, typically maybe I get 9 starter trades going and 6 will fail at about 40 pips each and 3 will succeed with 120 pips each. That yields 360 - 240 = 120 pips profit. Not quite a lottery win, but enough to justify my happy dance. It's very cute, you should see it.

For any particular pair, I want to see it move into 1X stoploss profit before I do anything. Then I'll reduce the stoploss by half. That means price is now 1.5X the distance from the new stoploss as the original stoploss was. So if the original stoploss was 50 pips, and price went up 50 pips, then stoploss is reduced to 25 pips, cutting the new risk from entry to stoploss by 1/2 and increasing the distance from price to stoploss by 50%, from 50 pips to 75 pips. This is done to make it more likely I can stay in a good trend and reduce the risk (always).

The next couple steps require a little finesse. After you go through it a few times though, it gets easy. On any trade, when price is up about 1.7 X the original stop loss, we'll move the sl to near break even, just to remove the risk from the trade. So if the original sl was 50 pips, at about +85 we'd set the sl to BE to remove all risk from the trade. The next step is to stack the second trade on the pair when price is about 2 X the original stoploss ahead. The second trade on the stack is only 60% as large at the base trade on the stack. This reduces risk and allows a little more flexibility in stop loss placement going forward. So if the stoploss on both of those entries is placed a little above the first trade entry, but still well below the second entry, we still risk very little since the second entry is only 60% of the first. As soon as possible, we'll move the stoploss up a bit to lock in a tiny bit of profit and remove all risk from the trade for the rest of it's existence. The general rule is once you have managed to remove all risk from a trade, you should never put any back in it, but I'm not strict with that, I just respect the rule best I can. Here's a live short trade with such a setup of two short trades stacked with stops set to lock in a little profit and remove all risk. Note that because the second entry (the bottom one) is only 60% of the base entry, the top one, setting the stops about in the middle of the two removes all risk from the trade and locks in a bit of profit. I do everything I can just visually since that part of my brain still works pretty good.

Really, getting the second trade on without taking on too much risk is the tricky part. The third is pretty easy, once price is up above the second entry about the same distance as between the 1st entry and the second one the third entry can be placed and stoploss can be advanced a little to reduce risk and lock in a little more profit. It looks like this live GPB/USD Long trade.

Just make sure you enjoy the great fun of all this, so if price reverses at any time and you have to exit breakeven or with very little profit, at least you had a good ride. With practice it gets easier and putting on the additional trades comes really naturally. If anyone tries this and it doesn't work for them, let me know and we'll try to figure out why.

Before I address the final section of this thread, EXITS, I'll open it up to comments or questions. Questions, comments? - G

The problem with this method and probably any successful method isn't making the pips, it's keeping them. This method focuses on entering trends and pyramiding or stacking trades as long as that trend continues. It can generate very large profits in a short period of time, but it can also lose large profits in a short period of time. As Ed Seykota said, The trend is your friend, until it bends. The trend will always end. It must, or price would go to zero or infinity. It's a complete fallacy to believe we can predict the end of the trend. It could happen at an opportune moment, like just after you've taken your huge profits, or it may end at the most inopportune moment, like just as your trades are set up and starting to earn back the cost of getting in them. We can't hope to predict the end of a trend, much less delude ourselves into believing we have any control over it. We absolutely must have a set of exit rules that will get us out with most of our profits most of the time.

This final section of the thread is about Exits. In the end, exits are where money is made or lost in trading. If you can't exit with your profits, you will never have any. The market will gobble up any profits you leave set before it long enough. Leaving exit timing up to gut feel leads to a very sick feel in the gut, like a sucker punch. Every time we are wrong, and we will be wrong time after time, we'll blame ourselves for doing something stupid. Picking exits is very similar to selecting apparent trends to trade. We know we'll be wrong very often, maybe even most of the time, but if we can automate the process with a good set of rules and follow them without exception, we can know for a fact that we will be very profitable over a large enough set of trades.

We can optimize those exit rules but we cannot ever eliminate all failures. Still, it is a great stress relief to know that even if you stayed in the trade too long and lost a ton of profits back, or got out just before they would have been made, you followed your rules exactly. In a sense it's not even the rules fault because you have optimized the rules to fit the market the best way you know how. It's simply the nature of the market to be uncertain and to be successful we must accept it as it is rather than trying to remold it to be what we'd like.

To master exits, we need to do two things. We need to create a logical rule for every possible exit situation (don't worry, there aren't that many), and we need to follow those rules without exception. Oh, we'll allow for modification of those rules, of course, just not in the heat of battle. If the rule says exit, we will always exit like good little robots. If at the time we don't want to exit and we'd rather stay in, we exit anyway and carefully consider afterwords if a rule change is needed. Most of the time it's not, we were just being greedy or fearful.

It turns out, creating the solid set of exit rules is the easy part. Following them is the hard part. I'll start with the easy part of defining a logical set of exit rules. Later I'll delve into strategies for following the rules without exception. Before I begin, are there any questions, comments, complaints, observations? - G

This...

This is it. This is the awkward, almost painful bit.

I'm not very good about it, but so much of what you saying about exits resonates very deeply.

One thing you stated made me realise it wasn't my exit policy was necessarily wrong, but I just didn't have faith "in the heat of the moment" to believe that actually following through on the Exit was the right thing to do at the time.

For what you're suggesting, I actually learned to do something similar with technology. I would check websites, read reviews and finally decide on some new tech (TV, PC, phone, earphones, etc). However, the minute the purchase was made, I NEVER went back to check online, or check magazines, or did anything about comparing what I'd just bought. What was done was done. I had done my research and, to the best of my ability, I made my choice and was happy with it.

So, why mention that thought process here? Because the minute you exit the trade...it's right there in front of you. You can't avoid it. You can see it perhaps slide back down slightly and then almost inevitably (so it seems) it moves back in our direction

"How stupid!", "How short-sighted!", "How ignorant was I to close those three, profitable trades that could have EACH earned another 50-100 pips!" .<-- Who's not had that mental battle just after exiting a trade that ends up continuing in the same direction.

So, I suspect that's part of the issue I have. Not that it's necessarily the wrong exit plan or exit actions, but it's the "in your face" part of the trading process that also makes it hard to accept.

I'm still feeling frustrated about not sitting with an EJ trade that was 650-700 pips up near its max...even though I eventually took it off at around 500. Did something similar with G/CHF, taking three trades off and then the next day or so later, continued back up. I had initially ignored my exit rule for the first, deeper retrace and could have been a bit costly. The second retrace wasn't even as deep, but I'd vowed to take it off based on a rule (set as SLs on the trades) and in fact I actually closed it manually, to force the rule, as I'd been considering adjusting those SLs.

So, please carry on discussing Exits, as I'm still undecided about a rule (or set of exit rules) that I'm happy with yet. At least now I'm working on accepting the result.

OK, back to addressing exits.

I'm essentially a swing trader who targets about 1 week holding time per trade, so my exits are tuned to that holding time. I'll go through them here, but if they don't meet your personality or methods, just adjust them to your personal style.

I have two sets of exits, one for individual trades and one for my overall portfolio of all active trades. For individual trades, I'll put a stop on initially of about 1 ADR or a little less, and a temporary Take Profit of 3 times ADR. The initial temporary TP rarely hits quickly, but it's a nice gift when it does.

The stop must never be increased in the heat of battle. That way always leads to the disaster of very large losses. That rule is set in concrete and can never be violated. If you need to increase your stops to fit your style, make that decision only after careful consideration and only before entering a trade. I will often exit a trade early before it gets to the stop if it is looking very bad. That reduces my losses a bit and improves my reward to risk ratio. I put stops just on the far side of prior support/resistance zones, trend lines or moving averages when it's convenient.

If the trade isn't stopped out and advances about 1 ADR in profit, the initial stop is reduced by half, reducing risk but allowing more room for the trade to breathe.

If price advances to about 1.5 ADR, I'll move the stop to Break Even to remove all risk from the trade.

Between 1.5 and 2 ADR profit I'll put a second trade on at 60% the size of the first and move both stops to a little above BE.

If price keeps advancing I'll move the stops to the very middle of the 1st and 2nd entries, removing all risk and locking in a little bit of profit.

From there I will continue stacking new trades on about every 1 to 1.5 ADR and moving stops up to the middle of the top two trades. If the price declines below that point (so the top two trades are equal and opposite, like -35 Pips on the top and +35 pips on the one below, the entire trade stops out. That happens often.

In this 3 trade stack example, for a 70 pip ADR trade stopping out, I would make 1.5 ADR, or 105 pips, profit off the base trade and break even on the top two.

If the trade goes to a 4 trade stack, I would make 2.5 ADR off the base trade, or 175 pips and 1.5 (0.6) = 0.9 ADR off the second trade and the top two would stop out even. That almost always happens.

As I add new trades on I move the TP up to keep it above about 2 ADR of the top trade. If it hits, I take it as a gift and move on. I never risk more than 0.5% of my account balance on a base trade and I quit taking new trades if I use 50% of my available margin.

That handles my individual trade exits. You can see stages of each of these steps posted in the live trade examples I have already posted elsewhere in this thread. As I said, these numbers can be adjusted to fit an individual style.

The next set of exits are for the entire portfolio of trades. I watch my floating profit for these. I ignore any cost of setting up the trades, which can be significant if I had many failed attempts before the trends took off. If floating profit exceeds 4% of my account balance in a day or 10% of my account balance in a week, I trigger my excess profits rule. If floating profit then drops by 1% on the daily or 2% on the weekly rule, I exit the entire portfolio of trades.

I may exit quicker if I'm feeling jumpy, but I will never let all my profits vanish. The profit can go up as far as the trends can take it, but it can only retrace a little before I'll close all trades and start over. Once we hit those sorts of numbers, probably 10 times what a good trader should be able to make consistently, profits tend to crash rather quickly and it takes a sharp eye and quick wrist to capture them before they slip away. Having played pinball in a misspent youth might help.

I also have a 5% of starting balance stoploss for the entire account for the week. So for example on a $10,000 account, if account balance dips below $9,500 trading is halted for the week.

This trading style produces lots of small losses and a few big wins for mostly profitable months for me. If anyone has a problem with it, let me know and we'll try to work it out.

That was the easy part. I'm happy to discuss it further if there are any questions. Next I'll discuss the hard part, sticking to the rules to keep losses small. Questions, comments? - G

Consider Tony Gwynn, who in 1999 became the 21st member of pro baseball's 3,000-hit club. That year, the former San Diego Padres outfielder finished the season with a batting average of .338. That means he was coming up empty nearly 2 out of 3 times at the plate. - Investors Business Daily

I'm a very simple minded fellow. I only have three simple rules to protect myself during trading. They are:

1. NEVER EVER increase stop during the course of a trade. This guarantees disaster.
2. Never risk more than 0.5% of account on any base trade.
3. Stop trading if account balance drops 5% in a week.

That's it. It's simple, but it's not easy. If you want to trade my system, you will want to print these 3 simple rules out and read them every time before you start trading. It will only take a minute but it can save your account and your self confidence. Best success. - G

Excuse me for quoting only part of your post Nefser, but it's these parts that I want to respond to.

In my case this mental battle was part of business I had to go to on a daily base, but I noticed it got better once I was trading for a couple of years. Trading became a routine. Now when I see my trades in hindsight could have made me a lot more it doesn't bother me one bit, only thing I sometimes do is do some research if it is possible to get a some of these profits in my pockets, but 99% of these researches discover it is not possible without loosing more profit in other market circumstances.
This also helps accepting the missed profits.
What helped me in the past was walk away when the profit was taken, turn pc off en weed the garden (makes the wife happy too) or go for a walk.

Indeed. The more you experience these situations, the easier it gets. I just want to experience these situations a LOT more. :-D

I also think it depends on personality types. I don't tend to suffer fools gladly, especially if I feel (with a fair bit of hindsight) that I was potentially being the fool. ;-)


In any case, thanks for the feedback and perhaps my wife and my dog would also appreciate if I closed large trades more often (and then took your advice). :-D

( The thing is...the dog wouldn't care about me weeding the garden and my wife would want to know why I was taking her for a walk... )

Looking Great G.

The only thing that I am not clear about is how do you decide if you will Close out a Stack at the end of the week vs letting it roll forward for potentially a really long run.

AG